Low market prices and terrorism torpedo US imports of LNG

Sam Fletcher
OGJ Online

HOUSTON, Feb. 15 -- US imports of liquefied natural gas (LNG) have plummeted since September with the collapse of domestic gas prices and increased security concerns about such facilities in the wake of the Sept. 11 terrorist attacks.

"The US received only 12 LNG cargoes during the fourth quarter compared with 75 cargoes during the first three quarters of 2001," said Robert Morris, industry analyst at Salomon Smith Barney Inc., in a special report issued Friday.

"Consequently US LNG imports in 2001 were only 640 MMcfd compared with the roughly 750 MMcfd estimated in our April report and 600 MMcfd in 2000," he said.

But despite recent developments that threaten proposed construction of some additional LNG terminals in North America, Morris said, there is still "longer-term interest in bringing remote 'stranded' natural gas reserves around the globe into the US market as LNG."

For now, however, higher market prices for natural gas in Europe are attracting LNG shipments away from the US, "even after taking into account the estimated 40¢/MMbtu premium needed to offset transportation and other costs associated with routing shipments across the Atlantic," said Morris.

For 7 months, near-month natural gas futures contracts on the New York Mercantile Exchange generally have traded at lower prices, adjusted for daily differences in the rate exchange, than comparable gas futures positions on the International Petroleum Exchange in London (OGJ Online, Jan. 31, 2001). That's a complete reversal of the historic norm since the mid-1990s when near-month futures contracts on the NYMEX always exceeded those on the IPE, often by several dollars.

As a result, CMS Energy Corp.'s open-access terminal at Lake Charles, La., which in recent years has served as a hub for US spot LNG trade, received only 5 cargoes during the final quarter of 2001, compared with 57 shipments in the first three quarters.

Tractebel North America Inc.'s terminal in Everett, Mass., the oldest operating US LNG facility, took only 7 cargoes during the same quarter compared with 30 earlier in the year, Morris reported.

On Sept. 26, the US Coast Guard imposed a 20-day ban on LNG imports through Boston harbor to that facility after local authorities expressed fears that those vessels might become targets for terrorist attack (OGJ Online, Oct. 16, 2001). That ban was lifted, despite protests from municipal officials, after marine insurer Lloyd's Register of Shipping convinced federal authorities there was little danger to that city from a LNG explosion or fire. Still, new safety provisions were imposed that restrict shipments through the harbor of LNG that is used for peak winter fueling purposes across New England where pipeline deliverability is constrained.

Meanwhile, El Paso Corp.'s newly reactivated LNG import terminal at Elba Island near Savannah, Ga., has received only one cargo of LNG -- a tanker originally bound for the Everett facility that was diverted because of the ban (OGJ Online, Oct. 3, 2001).

Reactivation of Williams Cos. Inc.'s LNG terminal at Cove Point, Md., was pushed back until at least the third quarter of this year after local elected officials forced a rehearing by the US Federal Energy Regulatory Commission of its earlier affirmative decision (OGJ Online, Dec. 20, 2001). Sen. Barbara Mikulski (D-Md.) led the effort to overturn FERC's earlier decision because local residents and officials feared LNG tankers might be hijacked and used to damage the Calvert Cliffs nuclear plant 4 miles from that terminal.

"Despite the reactivation of Elba Island and Cove Point, we do not expect a significant up tick in LNG imports anytime soon based on our full-year 2002 composite spot natural gas price forecast of $2.25/MMbtu," said Morris.

He now predicts US LNG imports will average only 550 MMcfd this year instead of the 1 bcfd earlier predicted. Imports are expected to increase to 800 MMcfd in 2003, with a projected composite spot price of $3/MMbtu.

"We still believe that LNG imports are set to play a key role in bridging the longer-term projected North American natural gas supply/demand imbalance," Morris said.

"While the economics for individual projects depend on a variety of factors including location and foreign government incentives, we estimate that the average domestic natural gas price necessary to support new LNG projects in South America and Africa for delivery into the US is roughly $3-$3.50/MMbtu"

Since last April, about a dozen new LNG import terminals have been proposed to serve the US market.

"However, we do not believe that all of the currently proposed plants are likely to be built," said Morris. "Enron's proposed plant in the Bahamas is no longer likely."

Contact Sam Fletcher at [email protected]